SMIC to meet strong chip demand by adding wafer capacity

China’s largest contract chipmaker, Semiconductor Manufacturing International Corp (SMIC), has cautioned that its margins will come under pressure this year as depreciation costs rise sharply, driven by a significant capacity expansion to meet robust chip demand.

Shares of the Hong Kong-listed company fell nearly 4% on Wednesday after it projected flat quarter-on-quarter revenue growth and warned that depreciation expenses could increase by 30% this year.

"We maintained high capital spending, which drove rapid revenue growth but also placed considerable depreciation pressure on gross profit margins," SMIC's CO-CEO Zhao Haijun said during an earnings call on Wednesday. He also cited efforts to capitalise on demand from Chinese chip designers.

The semiconductor supply chain - previously based on overseas design and manufacturing for the Chinese market - shifted to Chinese production throughout the year, Zhao said.

Analog circuits saw the fastest transition, followed by display drivers, image sensors and memory, microcontrollers (MCUs), and logic chips. SMIC would add about 40,000 12-inch equivalent wafers in new monthly capacity by the end of this year, Zhao said. It added 50,000 12-inch wafers in monthly capacity in 2025.

Zhao said strong AI memory demand was squeezing supply to other sectors, especially mid-to-low-end phones, causing memory shortages and cost increases for manufacturers.

China remained SMIC's biggest market, accounting for 87.6% of its revenue in the fourth quarter, while the U.S. contributed 10.3%. The company pre-purchased critical equipment, while ancillary equipment remained pending, creating timing mismatches, Zhao said. As a result, already-acquired equipment might not translate into full production capacity this year.